ACCOUNTING 200

IAS 36 Impairment of Assets

IAS 36 Impairment of Assets:

Question Bank
ACCOUNTING 200
IAS 36 Impairment of Assets

QUESTION 1 (40 MARKS)

XYZ Ltd purchased a machine (in order to produce a new product) on 1 January 2014. At that date
it was estimated that the useful life is 5 years. At that date the accountant estimated that the entity
could obtain R40 000 from the disposal of the asset, if the asset were already 5 years old and in the
expected condition at the end of its useful life. Costs incurred in obtaining the machinery were as
follows:

• Cash price = R180 000

• Delivery costs = R35 000
• Advertising costs for new product = R14 000
• Installation costs = R25 000
• Staff training = R7 000

The machine was available for use on 31 March 2014, but due to problems with the training of the
staff who went on a go-slow, was only taken into use on 30 April 2014. Machinery is carried on the
cost model and depreciated on the straight-line basis over its useful life.

During the 2015 reporting period the technology related to the machine developed rapidly and
management realised that the value of the machine declined significantly. At 31 December 2015 the
accountant made available the following figures related to the machine that could be relevant:

• Discounted future cash flows = R135 000

• The selling price in an orderly transaction = R134 000
• The selling price under liquidation conditions = R126 000

Management also did some research and came to the conclusion that it would not be possible to
sell the machine without the help of an agent who would charge R6 000 for this service at that
date.

On 1 May 2016, the management of XYZ Ltd decided to sell the machine. After an assessment the
accountant came to the conclusion that it was highly probable that the machine would be sold within
the next 12 months. The following information relates to the probable sale:

• Fair value = R119 000

• Agent costs = R7 000

After the machine had been classified as held for sale in the 2016 reporting period, the manufacturer
from whom XYZ Ltd had initially purchased the machine decided to discontinue the manufacturing
of the machine as it became too expensive to manufacture. It has since come to light that the
technology that suggested that the machine was obsolete was not in fact properly proven, leading
to a renewed interest in the machine, which is now the only workable machine for the manufacturing
of the company’s products. Some of the directors are however still convinced that it should be sold
as the value of the machine increased significantly as there were only 10 left in the country. On 31
December 2016, the following information was available:

• Fair value = R167 000

• Agent costs = R7 000
ACCOUNTING 200
IAS 36 Impairment of Assets

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QUESTION 1 – CONTINUED

REQUIRED:

1.1 Prepare the journal entries for the reporting periods ended 31 December 2014, 2015 and
2016. (30)
• Show all calculations clearly as marks are awarded for them.
• Ignore VAT.
• Journal descriptions are not required.

1.2 Explain what the accountant would have had to consider (criteria) on 1 May 2016 to have come
to the conclusion that it would be highly probable that the machine would be sold. (8)

1.3 If management changed its intention and decided to rent out the machine to benefit from its
scarcity to derive income or to sell it at a gain in the future, could the machine be classified as
an investment “asset” and treated in terms of IAS 40 Investment properties, i.e. show the
asset at fair value and recognise all fair value changes in profit or loss for the period in which
it arises? (2)
(40)
ACCOUNTING 200
IAS 36 Impairment of Assets

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QUESTION 1 (SUGGESTED SOLUTION)

1.1 Journal entries To get the mark (1 for each journal except reclassification to NCAHFS) component of F/S must be indicated
Date DR CR
1 Jan ‘14 Machinery (SFP) (180 + 35✓ + 25✓) 240 000 Jnl✓
Bank 240 000

31 Dec ‘14 Depreciation (P/L) 30 000 Jnl✓

Accumulated depreciation (SFP) 30 000
(240 – 40/5 x 9/12✓)

31 Dec ‘15 Depreciation (P/L) 40 000 Jnl✓

Accumulated depreciation (SFP) 40 000
(240 - 40/5)✓

Impairment loss (P/L) 35 000 Jnl✓

Accumulated impairment loss (SFP) (Calc.1) 35 000

1 May ‘16 Depreciation (P/L) 13 846 Jnl✓

Accumulated depreciation (SFP) (135/3,25✓ x 13 846
4/12)

Impairment loss (P/L) 9 154 Jnl✓

Accumulated impairment loss (SFP) (Calc.2) 9 154

Non-current assets held for sale (SFP) ✓ 112 000

Accumulated depreciation (SFP) ✓ 83 846
Accumulated impairment loss (SFP) ✓ 44 154
Machinery (SFP) 240 000 ✓

31 Dec ‘16 No depreciation – IFRS 5 ✓

Non-current assets held for sale (SFP) 44 154 ✓

Reversal of impairment loss (P/L) (Calc.3) 44 154 ✓

Calc. 1
Carrying amount = 240 000 – 30 000 – 40 000 = 170 000 ✓
VIU = 135 000 ✓
FVLCTS = 134 000 – 6 000 = 128 000 ✓
Recoverable amount = Higher of VIU and FVLCTS = 135 000 ✓
Therefore Impairment loss = 35 000 ✓

Calc. 2
Carrying amount (1 May 2016) = 135 000 – 13 846 = 121 154 ✓
Fair value less costs to sell = 119 000 – 7 000 = 112 000 ✓
Therefore Impairment loss = 9 154 ✓

Calc. 3
Carrying amount (31 Dec 2016) = 112 000 (No depreciation) ✓
Fair value less costs to sell = 167 000 – 7 000 = 160 000 ✓
Reversal of impairment = 48 000 ✓
Limited to previous cumulative impairment loss recognised = 44 154 ✓P
(9 154+ 35 000)
(30)
ACCOUNTING 200
IAS 36 Impairment of Assets

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QUESTION 1 (SUGGESTED SOLUTION - CONTINUED)

1.2 Criteria for classification of a non-current asset as held-for-sale

All of the following should be complied with:

The asset must be available for immediate sale in its present condition. ✓
Normal terms and condition should applyy for the sale of the machine. ✓
The sale must be highly probable. ✓
The appropriate level of management must be committed to the sale of the machine. ✓
An active programme to locate a buyer must have been initiated. ✓
The asset must be actively marketed at a price that is reasonable in relation to its fair ✓
value.
The sale must be completed within one year from classification. ✓
It is unlikely that the plan to sell will be changed or withdrawn. ✓
(8)

1.3 May machine be classified as an investment asset i.t.o. IAS 40 Investment properties?

No, the machine may not be classified as an investment asset i.t.o. IAS 40 ✓
Reason: IAS 40 deals only with properties, not other assets. ✓
(2)
(40)
ACCOUNTING 200
IAS 36 Impairment of Assets

QUESTION 2 (20 MARKS)

PART A

An entity with a reporting date of 31 December is developing a new production process. During
2013, expenditure of R1 000 000 was incurred of which R900 000 was incurred before 1
December 2013 and R100 000 was incurred between 1 December 2013 and 31 December 2013.
The entity is able to demonstrate that, at 1 December 2013 the production process met the criteria
for recognition as an intangible asset. The recoverable amount of the know-how embodied in the
process (including future cash outflows to complete the process before it would be available for use)
is estimated to be R500 000. As at 31 December 2013 commercial productions has not commenced.

REQUIRED:

Provide the criteria that had been considered in the recognition process and discuss the appropriate
accounting treatment of the internally generated intangible asset for the reporting period ended
31 December 2013.
___
(11)

PART B

During 2014, expenditure incurred on the production process amounted to R2 000 000. At the end
of 2014, the recoverable amount of the know-how embodied in the process (including future cash
outflows to complete the process before it is available for use) was estimated to be R1 900 000. As
at 31 December 2014 commercial production has also net yet commenced.

REQUIRED:

Discuss and supply the amount at which the production process should be presented at the end of
2014.
__
(3)

PART C

Discuss why the treatment that you suggested in Part B is justified in terms of the Conceptual
Framework for Financial Reporting (not IAS 36 Impairment of Assets).
__
(6)
___
(20)

(Source: Financial Accounting: GAAP Principles)

ACCOUNTING 200
IAS 36 Impairment of Assets

QUESTION 2 (SUGGESTED SOLUTION)

PART A

- The recognition criteria that would have been considered when deciding whether the
development costs should be capitalised are the following (of which all should be complied
with):
• The technical feasibility of completing the intangible asset so that it will be available for
use or sale; 
• Its intention to complete the intangible asset and use or sell it; 
• Its ability to use or sell the intangible asset; 
• How the intangible asset will generate future economic benefits; 
• The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; 
• Its ability to measure reliably the expenditure attributable to the intangible asset during
development. 

- At the end of 2013, the production process is recognised as an intangible asset at a cost of
R100 000 (expenditure incurred since the date when the recognition criteria were met, that
is, 1 December 2013). 

- This amount does not exceed the recoverable amount of R500 000, therefore, no impairment
write-down is required. 

- The R900 000 of expenditure before 1 December 2013 is recognised as an expense because
the recognition criteria were not met until 1 December 2013. 

- This R900 000 expenditure is likely to have been research, therefore, must be expensed. 

- This expenditure of R900 000 will never form part of the cost of the production process
recognised in the statement of financial position. Once research costs have been expensed,
it may never be reversed and capitalised. 

- Amortisation of this intangible asset cannot start at this stage, as commercial production has
not started. 
(12 limited to 11)

PART B

- At the end of 2014, the cost of the production process is R2 100 000 (R100 000 expenditure
recognised at the end of 2013 plus R2 000 000 expenditure recognised in 2014). 

- The entity recognises an impairment loss of R200 000 to adjust the carrying amount of the
process before impairment loss (R2 100 000) to its recoverable amount of R1 900 000. 
(3)
ACCOUNTING 200
IAS 36 Impairment of Assets

QUESTION 2 (SUGGESTED SOLUTION - CONTINUED)

PART C

- An asset is a present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits. 

- An asset need not have a physical form, thus development costs (production process) may
be classified as an asset. 

- If it becomes apparent that the carrying amount will not be recovered by associated future
economic benefits, it is an indication that the asset may be impaired. 

- The carrying amount should reflect the amount that the entity expects to recover from
potential future economic benefits. 

- As the recoverable amount (R1 900 000) is lower than the carrying amount (R2 100 000), it
is clear that the expected future economic benefits is lower than what was originally expected
to be received from the asset. 

- The decrease in expected economic benefits (R200 000) should be expensed and is
regarded as a loss, as it represents a decrease in an asset that results in a decrease in
equity, or other than those relating to distributions to holders of equity claims. It is therefore 
an impairment loss
(6)

(20)